Companies say they have a rough sense of their internal pay ratios, but they argue that their global workforces and varied payroll systems make calculating the median cumbersome, if not virtually impossible. What’s more, they say, disclosing pay ratios would make them easy targets for CEO-pay critics.

The first point is echoed by the head of human resources for huge consulting firm Accenture. “The amount of work to calculate the ratio would be really quite incredible,” she tells the Wall Street Journal.

But a VP at Whole Foods, which has had a cap tying executive pay to employee pay for a decade, tells the paper that’s all a lot of hogwash: “It doesn’t take months and months and millions of dollars to calculate this. It’s a relatively straightforward process that takes a few days.”

There is nothing about Section 953(b) that regulates or ties CEO pay to the level of employee pay. It only requires that the ratio is disclosed to investors.

But the president of the U.S. Chamber of Commerce’s Center for Capital Markets claims that “The ratio is not going to be a meaningful way to help investors but will be used as a political tool to attack companies.”

The Journal cites a 2010 joint study by Northeastern University’s business school and Bentley University that found a relationship between increasing CEO pay and decreasing employee productivity.

Senator Robert Menendez of New Jersey, the lawmaker behind the provision says investors have a right to know how much a CEO makes relative to the rest of the people in the company.

“It’s embarrassing that they pay their CEO 500 times what they pay their typical worker, especially if the company’s performance has been mediocre,” says Menendez.

Back in March, Public Citizen’s Bartlett Naylor said it was “ludicrous” that these global firms were complaining about the difficulty of figuring out median pay.

“Such claims either constitute an embarrassing confession about widespread mismanagement of a central financial issue, or a disingenuous smokescreen,” said Naylor at the time.

It is between the CEO and the shareholders and potential shareholders.That is why it is readily available in the10-K. This document presents a wealth of info most investors don’t even bother to read (as evidenced by these comments).

And one could argue that laying off a few hundred or thousand people, giving their work to other people without giving them a raise, and then using the payroll savings to give yourself a raise/bonus, qualifies as greed — especially if the company (i.e. shareholders) don’t realize any savings.

Also, demanding a tax cut because you claim to be a “job creator” when you are in fact eliminating jobs can be seen as greed, not to mention wholly dishonest and a classic case of doublespeak.

You are really spinning what actually happens to fit your own narrative. :Layoffs are to better match costs with income. A company would be much better off growing and hiring. The savings goes to the shareholders, as evidenced by the stock going up when layoffs are announced. This shows that the company is managing expenses well. It does not mean the CEO gets a raise. But later on if the company performs well, his value may be recognized.

The tax issue: They are not demanding a cut, they are asking the tax stay the same, which means they are still paying most of the taxes. Paying, what 90% of the taxes isn’t enough?

Why not? If it’d disclosed that a CEO can get a 10 million dollar bonus for all of the “efficient” ways of cutting back – what does that mean? A few hundred people get fired and products subjected to shrink rays.
This is just an example.
That 10 million dollars is enough to compensate 200 employees at $50,000/an. Double that of the employees are making 25k – which is where most people I know are at.
Where DID you think they got their bonuses from? Out of pocket from shareholders? You must be shrooming.
Bonuses come from screwing someone over.
Millions of dollars come from screwing someone over.
No one got mega rich by being the nice guy who helped those less fortunate. You’re really deluded if you think they did.
So yeah, it does matter.

The first point is echoed by the head of human resources for huge consulting firm Accenture. “The amount of work to calculate the ratio would be really quite incredible,” she tells the Wall Street Journal.

In all fairness, a project that has an established CMM can calculate the amount of effort it will need without off-shooting its budget estimates. I once worked in a project that had a good estimating model and clients were pretty satisfied when presented with the metrics.

As an ex-employee, I have had an experience of other competitors trying to win the contract with a client by under-estimating their budget. They did get the contract just because they provided a way lower cost than Accenture did — needless to say, that competing company ended up spending all their allocated budget halfway before the project was done.

I know my rant’s quite off-topic, but it was just funny how the consultants contacted us and tried to make us work for them under the table — but we need allocated hours. That means a WBS, which means needing a budget — which was already all used up.

As someone who has first hand knowledge of Accenture, I can tell you its a smoke screen. They’re trying to intentionally muddy the waters about the pay of contractors, onshore, offshore, affiliates, cost of living, etc. to 1) resist complying with the law and dilute its impact and 2) get people to hire them to help them comply. “Oh you have an enhancement request for SAP? We’re happy to help. Let us propose a change request to our multimillion application outsourcing deal.”

Well, to be fair, they’re not looking for a mean (which is what I’m guessing you mean by average), where you add every number and divide by the number of entries. They are instead looking for a median, which means the middle number in an ordered sequence. It still should be dead easy (dump the numbers in the sheet, order them from low to high, and take the middle number), but it’s a *tiny bit* more time consuming than a mean calculation.

I think their problem is with things like cost of living discrepancies, outsourced hires, contractors, benefits, that kind of thing. Also, should they calculate the hours worked by salaried employees to get a per hour baseline to compare with their hourly workers or does that not matter? I agree that it’s not an onerous burden, but there is quite a bit more to it than just sorting the “total salary” field in their payroll spreadsheet.

Yes, I did oversimplify it, I’m sorry. I shouldn’t have stated it was that straightforward. I would hope that the SEC has outlined some guidelines as to who should be included (contracted employees, aka temps, probably would not be included, for example). I would also hope they have included informtion about pay scaling for hourly employees. That is the only way the SEC could be reasonably sure that everyone is reporting accurately.

Even if you have FTE in your HR system as a percentage (ie, .5 FTE = 20 hrs/week), and you have clear specifications on whether to include temps, contractors, consultants, interns, etc, there is still the possibility that their HR system is separate from their payroll system. You also have to figure out if you are supposed to report actual earnings or yearly salary. Then you have to decide if bonuses, overtime, incentive pay, pay corrections, etc are going to be included. Then, you have to consolidate your payroll system data with the payroll system data of various regions (in large organizations, sometimes different regions have different systems), and make sure you are all comparing apples to apples. This is before adjusting for exchange rates for foreign employees and some of the other difficulties involved with these types of data. The median at the end is the easy part. It’s getting the data to perform the median on that is the hard part.

You’re telling us that companies don’t have fine control over the wages of their employees, and obscene amounts of data on compensation packages and cost-of-living for their various locations?

And what the fuck does cost-of-living have to do with anything? What does the number of hours worked by a salaried employee have to do with anything?

Salaried employee hourly compensation is figured by applying a fixed number of hours, in every company, and has been for decades. Usually, that number of hours is either 2000 or 2100.

If you want to include incentives, that’s a dangerous road, since most CEOs are given thousands of % more in incentives than median employees. That’s not hyperbole. Most median employees in multi-national companies aren’t provided with any bonuses., and they certainly don’t receive multiple times their yearly salary in severance when they’re terminated with-cause.

Or, type “=median(” into a cell in Excel and highlight the cells you want to find the median value of or type “columnname:columname” if you just want a whole column, close the parenthesis and hit enter. Instant median. Just tried it on a column with 1836 entries and it took all of 3 seconds to complete.

Part of the problem is that most global companies do not have a single payroll system. I’ve consulted on numerous time and attendance systems and it is simply insane. I’ve had one company that grew by acquisition where it factory they have is running a different payroll system.

The worst company I’ve consulted to, just within their USA operations, identified ~600 different critical IT systems e.g. 10 factories, each with a different time and labor system from different vendors, or different versions from the same vendor. Their goal after standardizing systems, is to only have 20 different systems.

Not only that, but often the HR, time and labor, payroll, and general ledger systems are very different systems using very different technologies that don’t talk together well at all. It’s a wonder anyone ever gets paid.

Survey says – disingenuous smokescreen. I’ll give them that they might be tracking mean instead of median pay right now, and maybe just for hourly people or the sales force or something, but I think any large company tracks some kind of average pay already as part of their usual metrics.

The argument about foreign workforces is almost negated by the metric being median and not mean. They would almost have a point if it were mean. If I stretch my imagination I could see a company with more than half of their workers in another country needing to explain the ratio being so high by making a note of that fact, but I don’t think there are too many companies like that who are registering with the SEC.

Yep, there are some, my point was not none, but few (relatively speaking). I think a lot of those are European too so the cost of living is quite comparable. I should have specified “low cost of living foreign country” instead of foreign country in my original post, my bad.

Before anyone corrects me again, I should have said “first world” instead of European, as in my head I was including Japan and South Korea in my mental list of foreign countries I wasn’t talking about for the location of the workforce.

Exactly. If I invest in a company that is making mediocre profits and the CEO to median pay is several hundred to one, then I am not going to invest in that firm anymore until their board changes its mind.

I was about to cut-and-paste this exact thing. What the fuck kind of reasoning is this? We don’t want to provide the information that you’re requesting because it will make us look bad? That’s why they want the information!

“The ratio is not going to be a meaningful way to help investors but will be used as a political tool to attack companies.”

Yeah. Maybe you should think hard about that. Maybe all those outraged people have a point, a point which up to now you haven’t understood. If you really decide that there is nothing wrong with your CEO’s pay, then surely you will be willing to stand up and defend it to your critics. In fact you can consider it an opportunity for you to teach people your perspective.

Please submit to the world your salary and how much you pay your kids in allowance. If the difference is more than 90 percent, we may have to get some unemployed poets and bloggers to come sit on your lawn and get mad.

Also, if your 7-year-old is unhappy with his allowance and complains about it, or about having to do chores to get the allowance, can you throw him out in the street?

But most of all…are you selling shares in your family to people and firms who are investing their own money, as well as possibly other people’s retirement plans, to help provide that allowance money? If so, I think your have a right to know how much of that money is going toward allowance, how much is spent on rent/mortgage, how much on that new car you bought, how much you donate to which political causes, etc.

I disagree. If a company is struggling and the CEO doesn’t make a lot more than the people who do actual work, then the wages aren’t so insulting. If the wages are insulting AND the CEO makes 500 times the median, then that’s insult-to-injury.

“Insulting” because the employee is making less than he thinks he’s worth? Or “insulting” because the employee is making less than what the CEO is making?

The first concern is the employees problem. A potential employee can always negotiate a salary. Unless there’s a union involved.

The latter — that’s really none of the employee’s business.

Employees can rate the fairness of their wages based on what they are offered compared to what they think they are worth — not what they think the CEO is worth. If they think they need more money, then they have to either make themselves more valuable, or come to grips with the fact they bring nothing to the table that isn’t available in a million other places.

I don’t know in what world you live in, but in the real world, there are a lot of jobs that pay only minimum wage, or just enough above it that the employer can say they don’t pay minimum wage, and there is NO negotiating. If the job doesn’t attract qualified candidates, the job just goes unfilled and everyone else — usually a low-level salaried manager — has to work 80 hours a week to make sure everything gets done. And the manager doesn’t get to negotiate, either — take it or leave it.

First, for a small company that has limited operations outside of the US, I’d more or less agree. Yes, there are standard of living differences among the states, but just suck it up and move on.

However, for a huge multinational that might have a corporate and sales office in the US, but all its manufacturing is overseas, how do you exactly calculate that ratio? (I’m using round number to make the point easier!!!) You pay those workers $2 an hour. That seems like nothing, but we need the perspective. What if the median income for that country is $60 a month? You’re now paying them 8x what the average worker in that country makes ($60/30/8). So do you then translate that to USD-equivalent pay as $320k ($40k being the American median income times 8?) Granted, its a simplistic point, but it could be a huge factor.

But, now that I think about it, what if you have two companies with the same number of employees and all other things equal. One has them all in California, the other has them all in Texas. Both pay their CEOs the same amount, but the employee pay is exactly equal to the cost of living differences between those two locations. For ease again, lets say California is twice the cost of Texas and those Texas employees make $40k and the CEO makes $1 million. The Texas firm would have a ratio of 25:1 and the California company would have a ratio of 12.5:1.

In your simple example the ratio then tells us that the CEO of the TX company is paid twice as much in real dollars as the CA CEO.

But you have a valid point, the ratio won’t be a precise apples to apples comparison between companies for reasons you outlined. It will be apples to pears and give a general idea. I can see companies disclosing the ratio and then having a few paragraphs explaining that they’re mexican operation skews the ratio, etc.

I’m not really seeing a problem here. Company ABC has lots of overseas workers, which means the median pay is much lower, but the CEO is in the US, so his pay is higher. Well, then, it’s still valuable, because it tells the investors that they are investing in a company that has established jobs overseas instead of in the US. That’s important to some investors.
Your other example of cost of living difference in the US – well, if all of the employees are in California, I would hope that the CEO also is in California, so they can actually oversee the company. Same with the company in Texas. So, if the two CEOs, living in different states, make the same pay, then that’s definitely relevant investment information – it is exactly what is being requested, the ratio of CEO pay to median worker pay.

If all of the employees are based in one state, the investors ought to know this, and be aware of the differences. I think most people know that California costs more than most states.

Keep in mind, the companies are only being required to provide the information. They aren’t required to adhere to any particular standards, such as the (now-abandoned) Ben & Jerry’s Rule. And nobody is preventing the companies from providing additional information of the type AtlantaCPA mentioned.

The biggest complication, I would think, would be the exchange rates for international companies, especially if they operate in countries with volatile economies. But they could easily calculate a snapshot, showing the figures on a specific date each year. (Doesn’t have to be the exact same date each year.)

Cost of Living differences only matter from the bottom up, not from the top down. That is to say, they matter to the people making the money, not the people giving the money out.

Companies don’t blindly decide where to build factories or industry or office buildings. They do it based on a lot of factors, one of which is cost of labor. Why do you think our entire manufacturing economy dried up and moved to Mexico? Cheap. Labor. The CEO isn’t going to pay himself less just because he saved a few million dollars in HR overhead. He’s going to pay himself more for making such great decisions for the stockholders. Ratio goes up.

Knowing what this ratio is will raise questions, and that’s the important thing.
“Why is your CEO paid 1000x your median employee income?”
“Well it’s because most of our production is in Mexico.”
“Re-he-he-heallly….”

or

“Your pay is 1mil/year but the ratio is 2:1… what are you doing that you can pay a median income of 500k?”
“We only have 4 employees”
“But you’re a multi-national automotive company, and you’ve produced lots of cars which people drive on the street. Who built them? You still have to report contract labor you know.”
“Yeah, we creatively accounted for that in other places that aren’t the HR budget.”
“What else have you ‘creatively accounted for’?”

“But the president of the U.S. Chamber of Commerce’s Center for Capital Markets claims that “The ratio is not going to be a meaningful way to help investors but will be used as a political tool to attack companies.” ”

I disagree. It will help nearly all employees and investors finally see at least one way to prove that a CEO does not earn their living. Call it ammunition to make a CEO work instead of collecting golden parachutes.

“The amount of work to calculate the ratio would be really quite incredible”. I know you guys think the general public is stupid, and many are, but …cmon. These are things you already calculate for your own internal reasons. It’s like you know one number is $2 and another is $5, and someone asks you to add them together, and you say “well…now that’s a pretty crazy request”

First you have to make it sound really hard so they will set expectations low and hire you, then give them the answer with a big bill and tell them how you had to work a lot of overtime to calculate it.

It’s like Scotty from Star Trek, you say, “Cap’n I’ll need at least 2 hours to realign the dilithium matrix” Kirk-“You have… 5 minutes… Scotty” Then when you get it done you look like a hero!

If one company has 50 billion in sales with a medium wage of 60K and another company has 100 million with a median salary of 55K then the CEO of the bigger company SHOULD be making a much higher ratio, especially if it is the same type of company and each are profitable. Many reasons. For one thing many the first CEO grew the company to the higher sales. Even if not, he would be running a bigger company, it would be moire stressful and the risk of making a mistake could cost billions. We would want a higher skilled person. Even if they are the same type of company. If the medium job happened to be the same, say computer tech, then why would then should the tech with the same skills be making multiple times more if he works for the bigger company? The companies are competing for the same workforce. Should the the bigger company pay more for cars, cost of goods, water? Why would they for janitors?

I agree that there are problems with executive pay, it is just this number is useless.

Does the CEO of ANY company, successful or not, work 100 times harder than the people who do actual work?

I think that this number is quite useful. Especially to people who buy the company’s products, realizing that the only vote they really have is with their pocketbooks. If the products are of similar quality and cost, I will gladly buy the widget from the company who pays its CEO 10 times the median salary instead of the company that pays its CEO 100 times the median salary. Chances are the product from the 10x company is going to be of higher quality and lower cost than the 100x company anyway.

It isn’t about how hard they work, it is the skills they have and the contribution to the bottom line. A janitor may work harder, should he be paid more?

The smaller company is going to have a better ratio just by its size, it is not going to make the employees any better off in the smaller company. They probably make less, have fewer benefits, even could be treated worse, but the ratio will be better. You will make the wrong decision if you use the ratio. Any lowering of executive pays would go to the stockholders, the market price for an employee will not change. At times the stockholders might get a better return paying the executives more. I know it doesn’t work out that way all the time.

There are a multiple of social issues you or others might want to base your decision on, fine, but does that mean a company should be compelled to go through the expense of providing all the information? What about child care incentives? How about the employee happiness quotient? How many gays to they employ? Why is this ratio the one to pick above others? Besides the cost, why should a company be compelled to provide info that is designed soley to be used against them?

Just so you know where I am coming from, I believe in the arguments I made in the context, however I do have concerns that many executives are over compensated. On this site, corporations are automatically evil and greedy, and everyone else is the victim. I see the need to balance it out a bit because I believe that everyone has the same amount of greed in them as the corps, and it is often just as abused.

Sorry sentence should read: If the median job happened to be the same, say computer tech, then why should the tech with the same skills be making multiple times more if he works for the bigger company?

Then doesn’t this just mean that the CEO of the larger company can justify his higher pay? Or, if the smaller company’s CEO is doing a better job of building his company than the other CEO, he can say to shareholders, “Look at the ratio John Smith is making at the Acme Corp. with lesser results. I should be better compensated than him.” Sort of like when a starting quarterback gets a record contract — then every other quality QB (or his agent) has ammunition to ask for a raise.

Yes, but everything you mention has nothing to do with the employee/executive ratio. What you mention is something to bring up, but that is not what is being asked to be disclosed. I do not see a case for that number being used in any performance metric. I have taking a few courses on financial analysis, and that ratio is not mentioned.

One reason is a CEO may lower costs by doing a layoff, many times the layoffs are needed. Profits go up, he makes more, if there was an artificial reason why the ratio had to be kept the same, the CEO would have a disincentive to cut the costs. Shareholders would actually lose money

There are too many reasons the ratios could be different, and most have nothing to do with how the employees are actually being treated. That is the main problem, the ratio has very little to do with how the employes are treated.

Personally, if I’m going to invest in a company, I’d like to know the ratio, simply because it would give me some insight into how much they value the efforts of the front-line employees (y’know, the ones doing the actual work) versus the senior executive team. This insight could also be indicative of how they view their customers and suppliers as well.

For instance, would I want to invest XYZ company, say retail for example, that keeps telling their front-line employees how important they are and how much they matter to the success of the business while paying them minimum wage and the CEO earning 8 figures? Probably not. Using that information, it would lead me to believe that XYZ company doesn’t truly value their employees, and most likely, their suppliers and customers. Such information would lead me to believe that XYZ company is only interested in short-term gain, rather than long term sustainability.

I realise that my hypothetical XYZ company could, in fact, represent a vast majority of businesses out there, which is why I’m more apt to put my money in municipal/state bonds and T-bills, rather than invest in the stock market. I dislike rewarding bad behaviour and such exists in both the public and private sector, but at least with local investment, it’s more likely that it’ll result in more local jobs, instead of the loss of American jobs to China or India.

“Personally, if I’m going to invest in a company, I’d like to know the ratio, simply because it would give me some insight into how much they value the efforts of the front-line employees (y’know, the ones doing the actual work) versus the senior executive team.”

The ratio might infer it, but it doesn’t really do it because the management is paid based on size of the company and profits. The cost of labor isn’t. A worker at a company twice the size is not going to be paid twice as much doing the same thing.. The smaller the company, the better the ratio will look to you, but the pay and how the employees are treated could be BETTER at the bigger company.

gotta call bullshit on this. Every company knows their labor costs, it’s a basic cost unit that is needed for oh so many calculations done by any business on a daily basis. Getting the total number of employees should be relatively easy for any payroll system as well, unless you’re paying people under table.

I’d make it simple. A company can get out of their reporting requirement with the following statement in their 10k:
“Our accounting methods and systems are in such poor shape that we simply aren’t capable of determining what we pay our employees”

Now a day HR is where folks go who cant hack real jobs. I’ve always had some type of dumb problem with any HR dept in any company I’ve worked at (lost paper work, wrong paycheck, forgot to do X). Cant do basic math, I beleive it and have seen it.